Peso back at P42 level

By Jun Vallecera, Business Mirror

Posted at Jul 07 2011 07:30 AM | Updated as of Jul 07 2011 09:37 PM

MANILA, Philippines - The exchange rate pushed past the P42-per-dollar barrier on Wednesday to P42.89, the highest since May 11 when it closed also at this level.

At the Philippine Dealing and Exchange Corp., or PDEX, the local unit gained an average of 20.4 centavos to P42.889 per dollar, driven higher by expectations of still another rate hike when the Monetary Board, the policymaking body at the Bangko Sentral ng Pilipinas (BSP), meets on July 28.

Currency traders have since bet on the likelihood of another rate hike when inflation rose to a 26-month high averaging 4.6% in June using 2000 prices. With inflation bearing down on the economy, the bet was for the Monetary Board to raise interest rates, making peso instruments prospectively more attractive than they are already.

BSP Governor Amando M. Tetangco Jr. said fundamental factors have a positive influence on the exchange rate, which is seen to appreciate to P41 per dollar toward the latter part of the year by the Manila unit of the British-owned lender HSBC.

With risk aversion among fund managers in developed markets still prevalent, foreign-capital flows still favor emerging markets like the Philippines, HSBC said.

Tetangco said the surplus state of the country’s current account and the likelihood of sustained and higher growth this year in terms of the gross domestic product “remain positive” and, therefore, favorable for the peso.

“We have had two credit-rating upgrades in a period of one week and three in a period of six months so that is also positive for the economy,” he said.

The upgrades pertain to the credit boost announced by Standard and Poor’s in November last year, followed by a similar decision made by Moody’s Investor Service just last month and a little later by UK-based Fitch Ratings.

Tetangco noted continued and strong capital flows helping build foreignexchange reserves totaling $68.8 billion at end-May but likely topping the $70-billion mark the BSP expected by the end of the year.

How risks are resolved in certain countries under the European Union and in the United States should also tell how the local currency will perform down the line, he said.

Thus far, the peso has appreciated by 5.8% from year to date or just enough appreciation as to make Philippine exports competitive with peers in the region.

“Right now we are in the middle of the range in terms of both appreciation and volatility. We are basically moving together with the other currencies,” Tetangco said.

Moving in tandem with currencies in the region render Philippine exports competitive, which is a key development in an economy where exports account for about a third of total output or the gross domestic product.

Meanwhile, Finance Secretary Cesar Purisima said the government is studying the possibility of swapping dollar-denominated bonds into peso notes to reduce foreign-currency risk and better manage debt.

“We have been talking with our advisers about a potential liability management exercise,” Purisima told reporters on Wednesday. “Part of the goal is to reduce the foreign currency component of our debt and if swapping will help, we will do that.”

The government is evaluating whether such an exchange is “feasible and advantageous” and if it can be done as early as this year, Treasurer Roberto Tan said in a phone interview, adding that talks are informal and no mandate has been given. “This could be a breakthrough,” Tan said.

The Philippines is holding its third debt exchange in less than a year as the administration of President Aquino seeks to extend maturities and boost trading in longer-dated notes. The treasury is offering at least P50 billion each of January 2022 and July 2031 bonds until July 13 in exchange for shorter-maturity notes.